Leverage, earnings management and audit industry specialization: the case of Palestinian-listed companies

• Published in: AJAR (Asian Journal of Accounting Research) (Online) Vol. 9; no. 1; pp. 78 - 93
• Main Authors: Muhtaseb, Hind, Paz, Veronica, Tickell, Geoffrey, Chaudhry, Mukesh
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Publishing Limited 15.02.2024; Emerald Group Publishing Limited; Emerald Publishing
• Subjects: Accounting; Audit committees; Audit industry specialization; Audit quality; Auditing; Auditors; Capital structure; Corporate governance; Cost control; Credit ratings; Debt financing; Earnings management; Equity financing; Financial reporting; Financial statements; Hypotheses; Leverage; Licenses; Long-term debt; Monetary policy; Palestine; Palestinian people; Public enterprise; Short-term debt; Violations; Israel; Earnings management; Short-term debt; Leverage; Audit industry specialization; Long-term debt; Palestine
• ISSN: 2459-9700; 2443-4175; 2443-4175
• DOI: 10.1108/AJAR-07-2023-0220

PurposeThis study explores the relationship between leverage and earnings management in the context of Palestinian-listed companies, while also investigating whether audit industry specialization influences this relationship.Design/methodology/approachThe data used in this study are extracted from public financial reports of 39 firms listed on Palestine Stock Exchange (PEX), spread across the service, insurance, industry and investment sectors, for the time period 2011–2022. A model is developed to test 4 hypotheses about the relationships between long-term and short-term debts, and earnings management, and then to examine the influence of audit industry specialization on these relationships.FindingsThe results depict a significant, negative relationship between long-term debt and earnings management. Whereas the association between short-term debt and earnings management is insignificant. Audit industry specialization is proven to have no influence on the relationships between the independent and the dependent variables. Results are robust for firms that changed their accounting policies and using different audit industry specialization proxies.Originality/valueThe association between leverage and earnings management is a significant research topic, given that previous research identifies credit ratings and debt covenant violations as key factors which motivate earnings management. This paper fills a substantial research gap by examining the relationship between the two variables in the context of Palestinian-listed firms, while emphasizing the distinction between long-term and short-term debts. It also highlights key relationships that have been neglected in this particular context, which adds to the body of literature. Furthermore, the research's findings provide a solid information base that is of great interest to accounting and auditing experts and that may be seriously evaluated to support and advance the PEX sector.